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TPP: New Markets Opening Up For U.S. Food Products

The Trans-Pacific Partnership (TPP or Agreement) promises major new opportunities for U.S. food companies. The Agreement promises opens new export markets for U.S. food and agricultural products in the Asia-Pacific, particularly in Japan, Vietnam, and Malaysia. More important, if TPP is approved by the Congress (which is far from a sure thing at this point), it will put pressure on other major Asian and Latin American economies, e.g. Thailand, Indonesia, Philippines, Taiwan, and even China, to join the Agreement on similar market access terms or risk losing trade and foreign direct investment opportunities to TPP countries that are already part of the agreement and have duty-free access to the U.S. and Japan.

This overview is based upon an initial review of the TPP text, released on November 5, 2015. We caution that TPP is a sprawling 6,000 page agreement, and time constraints did not permit a detailed review of each provision of the text. The Agreement also involves a highly complex interplay of TPP chapters, rules, and language of general application to all TPP Parties; sector-specific annexes; bilateral appendices and side letters applicable to two or more TPP Parties; and country-specific tariff schedules, all of which require detailed consideration.

These caveats aside, it is already clear that U.S. food exporters should be big winners from the Agreement. Many food and agricultural tariffs will be eliminated on originating products immediately upon entry into force of the Agreement and almost all of the rest will eventually be phased out. The Agreement also significantly strengthens existing sanitary and phyto-sanitary (SPS) rules and makes the new SPS rules fully enforceable under the Agreement’s dispute settlement chapter. Given the U.S. food industry’s highly competitive cost structures and leadership in developing, manufacturing, and marketing attractive, high quality food products, it should reap major benefits from the new market access opportunities arising under the agreement.

1. Market Access/Tariffs

Under the TPP, tariffs on most food items will be eliminated immediately upon entry into force (EIF) of the Agreement. While a handful of highly import-sensitive agricultural products will remain subject to residual tariff-rate quotas (TRQs), e.g. dairy and sugar, the tariffs on almost all food and agricultural products will be phased out over time. The attached chart highlights the tariff reductions and staging applicable to certain selected food products.

The Agreement also contains provisions that relate specifically to biotechnology. TPP does not require changes to any Party’s existing laws and regulations, but does require TPP Parties to identify the documentation requirements for applications to market biotechnology products. It also requires them to provide information regarding any risk assessments conducted, contact information for the applicable entity, and any detection methodologies. These provisions appear designed to prevent situations similar to China’s decision to block imports of U.S. corn and soybeans last year and could prove useful if a food product is found to contain small traces of an unapproved biotechnology variety.

2. TPP Rules of Origin

The TPP Parties agreed on a set of overarching rules of origin to determine whether a good is originating in a TPP country and therefore eligible to receive preferential tariff treatment. These rules are extremely complex and specific to each product, defining the specific content or type of operations it must undergo in order to be considered a TPP originating good and receive the benefits of the elimination of duties under TPP.

Goods that are wholly produced in one or more TPP countries are deemed originating. The Agreement defines specific steps that are deemed to make a good wholly produced, focusing on whether certain critical steps in the production processes occur in a TPP Party’s territory. This applies to food and agricultural products grown or harvested in TPP countries and includes, for example, foods derived from (1) a plant or plant good grown, cultivated, harvested, picked gathered there, (2) a live animal born and raised there, or (3) a good obtained from a live animal there. These rules will come into play for many foods. Goods are also deemed originating if they are composed exclusively of materials originating in TPP. This would be implicated for food products produced in TPP exclusively from originating ingredients, and thus may turn on whether an ingredient qualifies as grown on harvested in TPP under the wholly produced rule.

A good that contains non-originating ingredients, e.g. fruits or vegetables grown outside TPP, can still qualify as originating and thus benefit from lower TPP tariffs if it meets certain product-specific rules. The application of these rules to specific foods requires a product-by-product analysis, although in general, the formula for determining whether a good is originating looks to the regional value content (RVC). For certain listed food and agricultural products, however, TPP provides an alternative methodology known as “tariff shift.” Because certain meats, seafood, vegetables, fruit, starches, and other food products are subject to special tariff shift rules, this impacts the tariff treatment of food products that incorporate certain food ingredients, e.g. a frozen meal that includes listed vegetables. Additionally, the TPP sets forth a de minimis rule that a good containing non-originating ingredients that do not satisfy the applicable change in tariff classification requirement can nonetheless be deemed originating if the value of all these materials does not exceed 10 per cent of the value of the good, subject to certain exceptions, including certain dairy products, dough, and fruit juices. Exporters will be required to certify that a product is eligible for preferential treatment under TPP, i.e. that it is originating, and maintain records and documentation in the event of an audit. Such certifications can be a major administrative burden, although the TPP takes some steps to try to address this.

3. Sanitary and Phytosanitary Measures

Unlike previous U.S. FTAs, TPP is an SPS-plus agreement that builds on the WTO Agreement on Sanitary and Phytosanitary Measures (WTO SPS Agreement). The WTO’s core principles of nondiscrimination, supporting scientific evidence and risk assessments, and adherence to international standards remain fully applicable, but the TPP establishes new rules, rights, and procedures, including expanded obligations with respect to international standards, scientific evidence, risk assessments, conformity assessments, risk management, and certifications.

With regard to the WTO’s core requirements that SPS measures be supported by science and risk analysis, the Parties recognized their obligations under the WTO SPS Agreement, and agreed to ensure that their measures do not arbitrarily or unjustifiably discriminate between Parties where identical or similar conditions prevail. However, addressing longstanding differences between the U.S. and EU over the interpretation of the WTO SPS Agreement, TPP clarifies that SPS measures must be supported by documented and objective scientific evidence and risk analysis. TPP further clarifies that SPS risk management measures must be the least trade restrictive approach that achieves a Party’s desired level of protection. These changes, while subtle, will help to curb abusive SPS measures based on minority science, e.g. EU – Hormones, or exaggerated risk management responses to minimal SPS risks to human, animal, or plant life or health.

While under both the WTO and the TPP, risk analysis is limited to consideration of measures that are no more trade restrictive than necessary, the TPP significantly tightens existing requirements for supporting scientific evidence and risk assessments. Like the WTO, TPP requires that SPS measures conform to international standards, guidelines, or recommendations, but in the event that a Party decides to go beyond an international standard, such action must be based on documented and objective scientific evidence that is rationally related to such measures.

While the WTO SPS Agreement contains only limited obligations on equivalence, the TPP expands the rights and responsibilities of TPP Parties in this area. Unlike the WTO, which focuses on equivalence of specific products, TPP focuses on systemic equivalence of a Party’s SPS regime. An importing Party must treat a measure as equivalent if it can be objectively demonstrated to the importing Party that a measure achieves the same level of protection. It must also do so if the exporting Party can objectively demonstrate its SPS system as a whole has the effect in achieving the same levels of protection as the importing Party’s system. This provision appears designed to promote greater use of regulatory equivalence, by limiting a Party’s ability to seize on minor, technical differences to deny equivalence.

TPP also addresses certain areas upon which the WTO SPS Agreement is silent. For example, the Agreement grants Parties the right to audit the exporting Party’s authorities and inspection systems. Such an audit may be systems-based, and can be used to evaluate the effectiveness of the exporting Party’s regulatory controls.

TPP requires that if importing Parties conduct import checks to ensure an imported product’s conformity with its SPS requirements, as is the case in many countries, the checks must be based on the risks associated with importation and carried out without undue delay. Avoidance of such delays is important for food products, given their perishability. TPP also limits the scope for restricting entry based on exaggerated responses to minor deviations from conformity standards that do not pose health or disease risks.

Additionally, if a Party adopts an emergency measure necessary for the protection of human, animal or plant life or health, that Party must notify the other relevant Parties and take their comments into account. Subsequently, the Party must review the scientific basis of its emergency measure within six months and make the results of the review available upon request. If maintained, the measure must be reviewed periodically. This appears designed to curb abuses of the so-called “precautionary principle” under Article 5.7 of the WTO SPS Agreement, e.g. EU – Biotech.

Finally, the TPP addresses the use of certifications, another area on which the WTO SPS Agreement is silent. The TPP limits the application of SPS certification requirements to those necessary to protect human, animal or plant life or health and requires importing Parties to limit required attestations to essential information related to SPS objectives. The TPP Parties also agreed to seek to develop model certificates for goods traded within TPP.

In an important breakthrough, SPS measures are subject to the dispute settlement procedures set forth in Chapter 28 of the TPP. Parties must avail themselves of the Cooperative Technical Consultations (CTC) protocol, which institutionalizes procedures for consulting and resolving any issues that arise between them, but if the matter cannot be resolved via CTC, Parties may resort to TPP’s dispute settlement procedures. The TPP dispute settlement mechanism will be phased in for SPS challenges in connection with audits, equivalence, and import checks one year after entry into force of the Agreement, and two years after into entry for challenges in connection with science and risk analysis.

In sum, while both the WTO SPS Agreement and the TPP Agreement are based upon the same basic core principles, TPP is the first truly SPS-Plus U.S. FTA and considerably expands the procedures and rights associated with the WTO. Because SPS barriers often surge as tariffs, quotas, and other overt trade barriers are phased out, the SPS Chapter is an important benefit for U.S. food and agriculture and should help limit efforts to circumvent the agreement.

4. Technical Barriers to Trade

Conformity assessment represents one area where the TPP’s TBT Chapter builds significantly on the WTO Agreement. While the WTO requires Members to provide national treatment in conformity assessment procedures and to ensure that such procedures do not result in unnecessary obstacles to trade, TPP imposes a broad national treatment obligation with respect to conformity assessment bodies. Thus, entities that conduct conformity assessments outside a TPP Party’s territory must be treated in the same manner as domestic conformity assessment bodies are treated. This means that foreign testing and certification procedures performed by another TPP Party must be accepted as proof that a product meets another Party’s TBT requirements. If this works, it should help to avoid duplicative testing – in the exporting country and then again in the importing country – saving companies time and expense. The Agreement explicitly prohibits Parties from requiring that conformity assessment bodies be located within their own territories, and requires greater transparency for criteria used by conformity assessment bodies and refusals to recognize foreign conformity assessment bodies. It also limits conformity assessment fees collected to the amount of the approximate cost of services rendered.

Of particular relevance to the food industry are new protections for proprietary formulas for prepackaged foods (as defined by Codex). Parties must ensure that information requirements are limited to what is necessary to achieve a legitimate objective and that the confidentiality of product information supplied for compliance with technical regulations is maintained for imported products just as it is for domestic products, such that legitimate commercial interests are protected.

5. Congressional Approval Process

A note of caution is in order about the timeline for congressional approval of the TPP, which is required for the agreement’s potential entry into force. Under the Constitution, U.S. FTAs require approval by both houses of the Congress. This is typically done under the Trade Promotion Authority (TPA or fast-track) procedures such as those adopted by Congress in June in the Bipartisan Congressional Trade Priorities and Accountability Act of 2015.

TPA prescribes a complex schedule for consideration of the TPP by the U.S. Congress, including, inter alia: (1) ninety (90) days’ notice of the president’s intent to sign the TPP; (2) a 105-day period for the U.S. International Trade Commission (ITC) to prepare a probable economic effects analysis; and (3) the preparation of draft TPP implementing legislation and mock mark ups by the Senate Finance and House Ways and Means Committees of the draft bill. TPA, however, is far from a guarantee of Congressional approval, and its procedures are merely rules of the House and Senate, and therefore potentially subject to change. In addition, TPA is conditioned on satisfactory consultation by the Administration with the Congress during the course of the negotiations and to specific negotiating objectives defined in the Act.

The draft agreement reached in Atlanta received a mixed reception on Capitol Hill, and certain compromises struck by the U.S. negotiators have proven controversial with certain U.S. industries and key Members of the House Ways and Means and Senate Finance Committees, which would have jurisdiction over any TPP implementing bill. The House and Senate leaderships have expressed skepticism about the Administration’s requests for an early vote, and major U.S. business groups, while expressing support for TPP, have conditioned that support on steps to address certain concerns.

As a result, any early vote scenario in May or June appears highly improbable given the political calendar, unless USTR can pull a rabbit out of its hat by quickly securing fixes to key congressional concerns. The Administration’s best chance for cementing President Obama’s major trade legacy appears to be a lame duck vote after the U.S. elections on November 8. Even that is far from a sure thing, since lame ducks generally focus on must-pass, non-controversial legislation and often face a crowded agenda and host of Members eager to get out of town. If TPP is not approved this year, the challenge of getting it through the Congress would fall to the next president.

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